(20 OCTOBER 2017)DAILY MARKET BRIEF 1:USD bounces back as US yields recover

It is Friday and the US dollar is going up. The greenback has been going on a roller coaster over the past five days as the immediate outlook is quite opaque. In the US, the dollar has been able to hold ground so far, thanks to buoyed optimism regarding Trump tax reform. This is not a done deal yet, however this is the first since the beginning of Trump’s mandate that he’ll be able - or at least he has the odds on his side for once - to pass one of its campaign promises. Big time. Yesterday evening the Senate made a significant step toward the tax reform. This is good news for the greenback, however we believe it is not time to put all your chips on the dollar as many uncertainties remains. To name just a few ones: although the Fed will most likely hike rate in December, there are speculations that next year rate path will be less aggressive than initially anticipated, then the potential nomination of a new Fed Chair could impact significantly the Fed future monetary policy, finally Trump’s efforts to implement his campaign promises have faced a fierce resistance from US politicians.

The US dollar surged across the board this morning. The green back rose 0.45% against the single currency, 0.20% against the pound sterling, 0.50% against the Aussie and another 0.70% against the Kiwi. The upward shift of the entire US yields definitely helped lifting the greenback, especially on the short-end of the curve as longer maturity treasury yields rose marginally. The monetary policy sensitive 2-year treasury yield bounced back to 1.5635% on Friday, while the 10-year yield edged up to 2.3680%. Overall, we remain bullish dollar, however the short-term environment could be full of surprise, meaning one has to be patient before loading long USD position.

By Arnaud Masset